The world’s new growth frontier: Midsize cities in emerging markets

Over the next 15 years, 400 cities that most executives have never heard of will
power global growth. This narrated slideshow explores them.

March 2011| byRichard Dobbs, Jaana Remes, and Sven Smit

Senior executives searching for growth face a stark new reality: roughly 400 midsize cities in emerging markets—cities they mostly will have never heard of—are posed to generate nearly 40 percent of global growth over the next 15 years. That’s more growth than the combined total of all developed economies plus the emerging markets’ megacities (those with populations of more than ten million, such as Mumbai, São Paulo, and Shanghai), which together have been the historic focus of most multinationals. Learning about consumer attitudes in the emerging markets’ “middleweight” cities (three-quarters of which have less than two million people), figuring out market entry strategies for them, and deciding how to allocate resources within and across them will all be crucial priorities in the years ahead.

Sidebar

Urban world uncertainties and assumptions

This interactive presents one scenario for the urban world’s evolution. Like any scenario, it is subject to large bands of uncertainty about population trends, migration, business innovation, per capita GDP, the evolution of city structure and management, and the outlook for exchange rates. Like these uncertainties, methodological issues influence urban economic forecasts. Below are details on how we approached two key methodological issues.

Defining cities. Where possible, the cities in our database refer to integrated metropolitan areas rather than specific city jurisdictions; we aggregate neighboring cities into a single urban center. To do so, we have relied on the Functional Urban Area definition from Eurostat’s ESPON project, as well as the metropolitan statistical area definition of the US Bureau of Economic Analysis.

Our approach often results in a relatively broad definition of “city,” because in many instances the city center and the legal city make up only a fraction of a total integrated urban region, in both population and area. Examples of such aggregations include Rhein–Ruhr in Germany; Los Angeles, Long Beach, and Santa Ana in California; and Mumbai and Thane in India. In some cases, functional urban regions cut across national boundaries (for instance, Geneva in Switzerland and France, as well as Copenhagen–Malmo in Denmark and Sweden). However, to be consistent across regions, we also strive to separate urban entities that are located closely together but have relatively little cross-city integration measured by commute flows (for instance, Seoul, Incheon, and Suwon in South Korea, as well as Beijing and Tianjin in China).

Measuring GDP. The MGI Cityscope database encompasses several GDP-measurement approaches because different ones are better suited to some purposes than to others. Per capita GDP figures, for example, are expressed in 2007 purchasing-power-parity (PPP) exchange rates, which are useful for shedding light on differences in living standards. On the other hand, in this interactive we express overall urban GDP data in US dollars measured at the real exchange rate (RER) because it most closely approximates the expected dollar value of revenues or income earned in different currencies. The RER for 2007 is the market exchange rate. We predict the 2025 RER from differences in per capita GDP growth rates, in order to approximate the combined effect of changes in local prices and market exchange rates that affect the dollar value of GDP or income in each country.11. The logic underlying this approach is that the faster per capita GDP grows, the more rapidly the relative cost of nontradable goods and services is likely to increase, leading to a higher dollar value of local sales. We account for this factor by assuming relative RER appreciation proportional to the gap in per capita GDP growth relative to the growth of the United States, adjusted for the share of nontradables in the economy.

New research from the McKinsey Global Institute (MGI) seeks to arm executives with the knowledge they’ll need to tap into global urban growth. (For assumptions underlying the data in this narrated slideshow, see sidebar, “Urban world uncertainties and assumptions.”) Midsize cities in emerging markets are poised not only to generate much of the world’s growth in the years ahead but also to become dramatically richer. By 2025, for instance, more of the world’s middle-class households will be in emerging rather than in developed markets. Companies selling products for middle-class children and retirees alike will find many of their biggest markets in emerging economies. The same will be true for infrastructure and basic-material companies that are helping to create these rapidly growing cities. It all adds up to a brave new world for the multinationals targeting them—and a better one for their inhabitants.

Interactive

McKinsey Global Institute’s Urban World app for iPhone, iPad, and Android devices uses a database of more than 2,600 cities around the world to illustrate how global economic power is shifting. For more information, visit our Urban World site.

Update:
This article was updated on April 20, 2011, to reflect a changed metric for per capita GDP, now expressed in 2007 purchasing-power-parity (PPP) exchange rates. A previous version reported per capita GDP in US dollars measured at the real exchange rate (RER).

About the authors

Richard Dobbs is a director of the McKinsey Global Institute (MGI) and a director in McKinsey’s Seoul office; Jaana Remes, based in the San Francisco office, is a senior fellow of MGI; Sven Smit is a director in the Amsterdam office.

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